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Blue Star: Surprise show by cooling products
Oct 28, 2014

Blue Star has announced second quarter results for financial year 2014-2015 (2QFY15). The company reported a 9% YoY increase in sales while net profits grew by 20% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 9% YoY during 2QFY15. This was mainly due to a 21% YoY growth in the Cooling Products (CP) segment. The Professional Electronics and Industrial Systems (PEIS) segment also saw a healthy 25% YoY growth. However, revenues from the Electro Mechanical & Project Services (EMPS) segment increased just 3%% YoY.
  • The operating profits fell by 27% YoY during the quarter. Fall in operating profits came on the back of 1.3% YoY contraction in operating margins.
  • Net profits increased 20% YoY, despite fall in operating profits.
  • Order book as on 30th September 2014 stood at Rs 14.9 bn, representing a 14% YoY fall.

Standalone performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations  5,810 6,333 9.0% 13,470 14,753 9.5%
Expenditure 5,592 6,174 10.4% 12,914 14,098 9.2%
Operating profit (EBDITA) 218 160 -26.7% 555 656 18.1%
Operating profit margin (%) 3.8% 2.5%   4.1% 4.4%  
Other income 69 128 86.2% 159 198 24.4%
Interest 128 106 -17.4% 245 216 -11.8%
Depreciation 84 91 9.3% 167 185 11.2%
Profit before tax 75 91 20.6% 303 452 49.4%
Tax - 0   - 52  
Profit after tax/(loss) 75 91 20.3% 303 401 32.3%
Net profit margin (%) 1.3% 1.4%   2.2% 2.7%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)*         9.5  
P/E ratio (x)*         36.2  
* On a trailing 12 months earnings.

What has driven performance in 2QFY15?
  • The company’s operating profits declined during the quarter mainly due to an increase in marketing, advertising and sales promotion expenses.

  • Other Income saw a substantial jump due to a write back of certain provisions during the quarter.

  • The big jump in other income along with a fall in interest expenses enabled the bottom-line to grow by 20% YoY despite the fall in operating earnings.

  • The Electro Mechanical Projects and Packaged Air-conditioning Systems segment, accounting for 62% of the total revenues in the quarter, increased marginally by 3%, while the segment’s margins registered a decline mainly due to higher input costs. The management has indicated that the erosion in the profitability of this segment is now under control since legacy orders now form only a small portion of the order book.

  • The revenue of Cooling Products during the quarter increased by 21%, while its margins grew significantly. Though the second quarter is typically a lean season for this line of business, an extended summer coupled with stable foreign exchange and commodity prices resulted in enhanced profitability.

  • The Professional Electronics and Industrial Systems business revenues increased by 25% on the back of enhanced demand.

    Segment-wise performance
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,866 3,961 2.5% 7,354 7,316 -0.5%
    % share  66.1% 62.1%   54.2% 49.3%  
    PBIT margin 5.4% 5.0%   5.3% 3.4%  
    Cooling Products (CP)
    Revenue 1,688 2,050 21.4% 5,651 6,889 21.9%
    % share  28.9% 32.1%   41.7% 46.4%  
    PBIT margin 4.8% 6.9%   8.9% 12.3%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 296 369 24.5% 553 630 13.9%
    % share  5.1% 5.8%   4.1% 4.2%  
    PBIT margin 25.5% 23.8%   23.8% 20.7%  
    Total
    Revenue 5,850 6,380 9.1% 13,558 14,835 9.4%
    PBIT margin 6.2% 6.7%   7.5% 8.3%  
What to expect?
The electro mechanical projects business was adversely affected during the quarter as the closure of specific legacy orders in its last phase is taking longer than the management earlier expected. Further, the commercial construction industry is yet to revive. However, considering the imminent improvement in the economic climate, the management reckons that this business is likely to improve in the long term.

Going forward, the company expects the cooling products business to drive growth considering that Blue Star enjoys a strong brand perception in a low penetrated market thereby offering significant potential.

At the current price of Rs. 343; the stock trades at 22.7x its FY17E earnings. Considering these expensive valuations, re-iterate our SELL rating on the stock.

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